The US economy died when middle class jobs were offshored and when the financial system was deregulated.

Jobs offshoring benefitted corporate executives and shareholders, because lower labor and compliance costs resulted in higher profits. These profits flowed through to shareholders in the form of capital gains and to executives in the form of “performance bonuses.” Wall Street benefitted from the bull market generated by higher profits.

However, jobs offshoring also offshored US GDP and consumer purchasing power. Despite promises of a “New Economy” and better jobs, the replacement jobs have been increasingly part-time, lowly-paid jobs in domestic services, such as retail clerks, waitresses and bartenders.

The offshoring of US manufacturing and professional service jobs to Asia stopped the growth of consumer demand in the US, decimated the middle class, and left insufficient employment for college graduates to be able to service their student loans. The ladders of upward mobility that had made the United States an “opportunity society” were taken down in the interest of higher short-term profits.

Without growth in consumer incomes to drive the economy, the Federal Reserve under Alan Greenspan substituted the growth in consumer debt to take the place of the missing growth in consumer income. Under the Greenspan regime, Americans’ stagnant and declining incomes were augmented with the ability to spend on credit. One sourcre of this credit was the rise in housing prices that the Federal Reserves low inerest rate policy made possible. Consumers could refinance their now higher-valued home at lower interest rates and take out the “equity” and spend it.

The debt expansion, tied heavily to housing mortgages, came to a halt when the fraud perpetrated by a deregulated financial system crashed the real estate and stock markets. The bailout of the guilty imposed further costs on the very people that the guilty had victimized.

Under Fed chairman Bernanke the economy was kept going with Quantitative Easing, a massive increase in the money supply in order to bail out the “banks too big to fail.” Liquidity supplied by the Federal Reserve found its way into stock and bond prices and made those invested in these financial instruments richer. Corporate executives helped to boost the stock market by using the companies’ profits and by taking out loans in order to buy back the companies’ stocks, thus further expanding debt.

Those few benefitting from inflated financial asset prices produced by Quantitative Easing and buy-backs are a much smaller percentage of the population than was affected by the Greenspan consumer credit expansion. A relatively few rich people are an insufficient number to drive the economy.

The Federal Reserve’s zero interest rate policy was designed to support the balance sheets of the mega-banks and denied Americans interest income on their savings. This policy decreased the incomes of retirees and forced the elderly to reduce their consumption and/or draw down their savings more rapidly, leaving no safety net for heirs.

Using the smoke and mirrors of under-reported inflation and unemployment, the US government kept alive the appearance of economic recovery. Foreigners fooled by the deception continue to support the US dollar by holding US financial instruments.

The official inflation measures were “reformed” during the Clinton era in order to dramatically understate inflation. The measures do this in two ways. One way is to discard from the weighted basket of goods that comprises the inflation index those goods whose price rises. In their place, inferior lower-priced goods are substituted.

For example, if the price of New York strip steak rises, round steak is substituted in its place. The former official inflation index measured the cost of a constant standard of living. The “reformed” index measures the cost of a falling standard of living.

The other way the “reformed” measure of inflation understates the cost of living is to discard price rises as “quality improvements.” It is true that quality improvements can result in higher prices. However, it is still a price rise for the consumer as the former product is no longer available. Moreover, not all price rises are quality improvements; yet many prices rises that are not can be misinterpreted as “quality improvements.”

These two “reforms” resulted in no reported inflation and a halt to cost-of-living adjustments for Social Security recipients. The fall in Social Security real incomes also negatively impacted aggregate consumer demand.

The rigged understatement of inflation deceived people into believing that the US economy was in recovery. The lower the measure of inflation, the higher is real GDP when nominal GDP is deflated by the inflation measure. By understating inflation, the US government has overstated GDP growth.

What I have written is easily ascertained and proven; yet the financial press does not question the propaganda that sustains the psychology that the US economy is sound. This carefully cultivated psychology keeps the rest of the world invested in dollars, thus sustaining the House of Cards.

John Maynard Keynes understood that the Great Depression was the product of an insufficiency of consumer demand to take off the shelves the goods produced by industry. The post-WW II macroeconomic policy focused on maintaining the adequacy of aggregate demand in order to avoid high unemployment. The supply-side policy of President Reagan successfully corrected a defect in Keynesian macroeconomic policy and kept the US economy functioning without the “stagflation” from worsening “Philips Curve” trade-offs between inflation and employent. In the 21st century, jobs offshoring has depleted consumer demand’s ability to maintain US full employment.

The unemployment measure that the presstitute press reports is meaningless as it counts no discouraged workers, and discouraged workers are a huge part of American unemployment. The reported unemployment rate is about 5%, which is the U-3 measure that does not count as unemployed workers too discouraged to continue searching for jobs.

The US government has a second official unemployment measure, U-6, that counts workers discouraged for less than one-year. This official rate of unemployment is 10%.

When long term (more than one year) discouraged workers are included in the measure of unemployment, as once was done, the US unemployment rate is 23%. (See John Williams, shadowstats.com)

Fiscal and monetary stimulus can pull the unemployed back to work if jobs for them still exist domestically. But if the jobs have been sent offshore, monetary and fiscal policy cannot work.

What jobs offshoring does is to give away US GDP to the countries to which US corporations move the jobs. In other words, with the jobs go American careers, consumer purchasing power and the tax base of state, local, and federal governments. There are only a few American winners, and they are the shareholders of the companies that offshored the jobs and the executives of the companies who receive multi-million dollar “performance bonuses” for raising profits by lowering labor costs. And, of course, the economists, who get grants, speaking engagements, and corporate board memberships for shilling for the offshoring policy that worsens the distribution of income and wealth. An economy run for a few only benefits the few, and the few, no matter how large their incomes, cannot consume enough to keep the economy growing.

As an economist, it is a mystery to me how any economist can think that a population that does not produce the larger part of the goods that it consumes can afford to purchase the goods that it consumes. Where does the income come from to pay for imports when imports are swollen by the products of offshored production?

We were told that the income would come from better-paid replacement jobs provided by the “New Economy,” but neither the payroll jobs reports or the US Labor Departments’s projections of future jobs show any sign of this mythical “New Economy.”

There is no “New Economy.” The “New Economy” is like the neoconservatives’ promise that the Iraq war would be a six-week “cake walk” paid for by Iraqi oil revenues, not a $3 trillion dollar expense to American taxpayers (according to Joseph Stiglitz and Linda Bilmes) and a war that has lasted the entirely of the 21st century to date and is getting more dangerous.

The American “New Economy” is the American Third World economy in which the only jobs created are low productivity, low paid nontradable domestic service jobs incapable of producing export earnings with which to pay for the goods and services produced offshore for US consumption.

The massive debt arising from Washington’s endless wars for neoconservative hegemony now threaten Social Security and the entirety of the social safety net. The presstitute media are blaming not the policy that has devasted Americans, but, instead, the Americans who have been devasted by the policy.

Earlier this month I posted readers’ reports on the job situation in Ohio, Southern Illinois, and Texas. In the March issue of Chronicles, Wayne Allensworth describes America’s declining rural towns and once great industrial cities as consequences of “globalizing capitalism.” A thin layer of very rich people rule over those “who have been left behind”—a shrinking middle class and a growing underclass. According to a poll last autumn, 53 percent of Americans say that they feel like a stranger in their own country.

Most certainly these Americans have no political representation. As Republicans and Democrats work to raise the retirement age in order to reduce Social Security outlays, Princeton University experts report that the mortality rates for the white working class are rising.

The United States government has abandoned everyone except the rich.

Paul Craig Roberts was Assistant Secretary of the Treasury for Economic Policy and associate editor of the Wall Street Journal. He was columnist for Business Week, Scripps Howard News Service, and Creators Syndicate. He has had many university appointments. His internet columns have attracted a worldwide following. His latest book, The Failure of Laissez Faire Capitalism and Economic Dissolution of the West is now available.

(The following is the fourth of a special five part series meant to be shared by professionals and non-professionals alike. This particular series covers
only one of the 7 Deadly Sins Every ERISA Fiduciary Must Avoid.)

My commentary (Lars) is in red bold letters.

Asset allocation cannot produce consistent results when applied to short-term time periods, whether the duration is a single year or an entire decade. The real world evidence of this was revealed in our previous installment. But this conclusion should not surprise anyone. For years, industry pundits have questioned the use of “tactical” – or short-term – asset allocation. Speaking with Morningstar’s Christine Benz in 2010, Jason Zweig, a personal finance columnist for The Wall Street Journal, said, “There are tactical asset allocation mutual funds that have been around for a long, long time. There are also many more that no longer exist because they were closed down, because the people with multimillion dollar budgets and supercomputers, and the world’s best investing software failed at it. So I don’t think that the average investor is likely to succeed at it, and I’m really not persuaded that most professionals will either.”1

Why Long-Term Asset Allocation Might be a Better AlternativeOne of the corollaries of asset allocation is the need to rebalance. This is theoretically most effective when practiced over extremely long time periods. The focus on the long-term is critical because, as 2002 and 2008/2009 attest, there always remains the possibility of a short-term “anomaly.” Mark Lund, author of The Effective Investor and located in Draper, Utah, says, “The secret to making asset allocation work is having structured funds in the portfolio mix, rebalancing, and staying with it for the long run. One must know that there will be years when the market goes down but discipline is what wins the game.”

Establishing a fixed asset allocation with regular rebalancing is said to offer the advantage of systematizing the “buy low/sell high” philosophy that investment gurus have long touted as the secret to attaining a winning investment record. Robert R. Johnson, President and CEO, The American College of Financial Services located in Bryn Mawr, Pennsylvania, says, “Asset allocation is not only a valid concept, it is an essential part of a client’s investment plan. It is the rough guide and as part of an investment policy statement, the contract between an advisor and client. Target asset allocations help the client and advisor navigate rough waters. If, for instance, a client has a target stock/bond mix of 60/40, when equity markets have outperformed bond markets, periodic rebalancing will ensure that an investor’s asset allocation doesn’t vary too much from the target. It provides a discipline of buying the asset class that has underperformed and selling the asset class that has outperformed. Straying too far from the target asset allocation can subject the client to unintended risks.”

Again, as with the short-term hypothesis in Part III of this series, it’s easy to conduct an experiment that tests a similar long-term hypothesis.

The Long-Term TestLike the short-term test, we used the Ibbotson data for annual stock and bond returns from 1926 – 2013. Unlike the short-term test, we’ve kept the mix limited to stocks and bonds. Also unlike the short-term test, we won’t guise this test in a story loosely based on characters from a classic Hollywood movie. This time we’ll go straight to the data.

First, we had to decide upon an appropriate long-term time period. Here, for reasons made obvious in Part V of this series, we picked a 40-year time frame. Next, we determined which stock/bond allocations to use. We went with 10% increments from 100% stocks to 100% bonds, figuring this was the only sure way to include the favorite balances of 70/30, 60/40, 50/50, and 40/60. There were a total of 49 40-year periods. The hypothesis here states there exists some allocation – not either 100% stocks or 100% bonds – that will provide the optimal portfolio mix. Here’s how they charted:

What’s interesting with this graph is that it shows the best allocation is no allocation – just put everything in stocks. Across the board, the 100% stock allocation has the highest high annual return, the highest median annual return, and the highest low return. This suggests, for 40-year time periods – not an unusual time duration for someone saving for retirement – the best returns comes from not using asset allocation.

And before you can say “risk-adjusted returns,” a statistical analysis shows the 100% stock portfolio possesses one of the lowest standard deviations. Only 90/10 (0.90%) and 80/20 (0.88%) have a lower standard deviation than 100% stocks (0.99%). All other asset allocations have standard deviations in excess of 1.00%, with the figuring increasing progressively until you have 100% bonds, which has a standard deviation of 2.34%.

We can conclude, with no rebalancing, a portfolio consisting of 100% stocks both performs better and is nearly as, if not more, reliable than all other stock/bond asset allocations.

So clearly, according to this study you should pay your advisor to buy only stocks.

But this leaves us with a question – What about rebalancing? Does rebalancing improve performance? That’s another hypothesis we can easily test.

The Rebalancing TestIn this test we pick one of the more popular asset allocations – the 60% stock/40% bond mix. Again using the annual data provided by Ibbotson from 1926-2013, this time we rebalanced annually. We used a 5% variance to trigger a rebalancing. In real life, to avoid the “blinker” problem (i.e., excessive trading caused by too small a rebalancing trigger), professionals will often use a larger variance (like 5%) before rebalancing. In our case, if at the end of the year stocks exceeded 65% of the portfolio, we sold down to 60% and put the balance in bonds. Likewise, if at the end of the year bonds exceeded 45% of the portfolio, we sold down to 40% and put the balance in stocks.

Remember, the concept of rebalancing is to “sell high” and “buy low.” The hypothesis would therefore state that, by rebalancing, the buy low-sell high asset class trading would yield a higher return. We ran the numbers with the 60/40 split to test this hypothesis. Here are the results:

40-Year Period Annual Returns for 60% Stock/40% BondAsset Allocation Mix Comparing With and Without Rebalancing

Again, the results of this test will disappoint the asset allocation believer. It turns out an investor who does not rebalance will receive a higher return in all areas compared to an investor who rebalances. Needless to say, if rebalancing a stock/bond asset allocation mix doesn’t beat the results of the static case, then it certainly won’t beat the 100% stock mix. Again, in this variation of the long-term test, asset allocation fails.

Why does rebalancing fail? It appears, because stocks routinely (and to a significantly higher degree) perform better than bonds. That means annual rebalancing has you selling stocks in more years than you’re selling bonds.

So, rebalancing is a scam, and you should just buy stocks.

Analyzing the resultsMore than a half century ago, a group of soon-to-be Nobel Prize winners made a guess. Built on the Capital Asset Pricing Model, The Efficient Frontier, and the primacy of rational markets, it became known as Modern Portfolio Theory. The consequence was asset allocation. We computed the consequences of that guess. We just now compared those consequences to experiment. The consequences disagreed with experiment. Therefore, it – asset allocation – is wrong. It’s that simple. It doesn’t make a difference how beautiful the guess was. It doesn’t make a difference how smart the proponents of asset allocation are, that its creators won a Nobel Prize, or that a lot of really famous – and even successful people – will go to their grave believing in asset allocation. It disagrees with experiment. It’s wrong.

If not short-term, if not long-term, does asset allocation offer any value? Intuitively, it seems as though we’re missing something. The practice of “asset allocation” existed long before Modern Portfolio Theory, portfolio optimization, and high-end computing power. There has to be a reason why it’s been used for so long. It had to have added some value to investors.

Maybe it was the way it was used. Maybe it would be beneficial to review how old-time portfolio managers determined whether to invest in stocks or bonds. Maybe, just maybe, knowing this might be the best way professional (human) advisers will be able to survive the coming Robo-Advisor apocalypse.

We’ll cover this in our next and final installment

This article was written for Fiduciary News, a publication written for “ERISA/401k fiduciary, the individual trustee and the professional fiduciary”. I suspect that many financial advisors and the like also read this blog.

I think it reveals some valuable information, although as studies often do, maybe not exactly the information that the researcher intended – or rather some bonus unintended information can be drawn from the focus of the study….in my opinion.

As I see it, handing the keys to your castle over to someone who’s best interest often lies in performing services for a fee(supposedly in your best interest) is not in your best interest. Generally, fees are paid for services such as management and rebalancing of your “portfolio”.

This study and the article’s author conclude that asset allocation and rebalancing are not effective; I agree.

I suspect that the author and I disagree over the value of his fiduciary services.

In other words, no disrespect is intended for the author, as I am sure he is a smart man, but I think that the person who has the most to gain or lose in a decision, should be the one making it.

This is the third installment in the Self Directed Retirement Questions, Answered.

These are questions I’ve been asked, my answers to those questions, and some commentary.

Question:What is the difference between a Self Directed IRA and a Solo 401k?

Answer:A Self Directed IRA requires a Custodian.Custodians are generally banks and investment houses.These Custodians charge fees to baby sit your money and tell you where you can and cannot invest your savings.An SDIRA is far better than a standard IRA, but it can still have high management fees, hoops to jump through, and limitations in what you can invest in.

A Solo 401k, which is designed for the self employed, enables you to invest in anything that the IRS allows.You become the Custodian; therefore you don’t have any filters on your investments (within the framework of the IRS’s allowed investments).You basically don’t have to ask permission to use your own savings as you see fit.Since it is a 401k, you can also borrow up to 50% of the value, up to $50,000.And again, you don’t have to ask permission or fill out piles of paperwork to take out a loan.You draw up the terms, put the terms in your safe, write a check from your 401k to you, and then just make the monthly payments to your 401k.Because you are making payments to your 401k, the interest is essentially free – you are paying yourself!A Solo 401k also enables you to contribute as the employee and the employer; in other words you can contribute over $50,000 a year to your retirement account – or over $100,000 if your spouse is a partner in the business.This is a BIG deal.

Do you have insider information regarding when Goldman Sachs will pull the carpet from under the U.S. stock market?

Is Janet Yellen your cousin? Does she give you tips?

If your answer is no to all of these questions, then why aren’t you taking this opportunity to divorce yourself from this bubble while it’s still inflated?

It is amazing to me that more people are not taking this amazing opportunity to take profits, and instead are electing to roll the dice on market timing or give the keys to their future to some guy who has no stake in their success.

I know that I should not be surprised, as history seems to repeat itself every 7 to 10 years these days. People have exceedingly short memories and attention spans that can only be measured in milliseconds.

I really don’t want to be that guy who said “I told you so”…or “I tried to tell you”.I get no joy in hearing sob stories about how people waited too long and got wiped out by the debt tsunami.

The current market value has no basis in reality.When it goes pop, it is going to destroy the retirement of millions of Americans who blindly followed the pundits on CNBC.

Please, Americans, spend more time thinking about your future and less time getting re-educated by mass media.